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Mexico Perspectives: Energy

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Background

Mexico has over 122 million people, making it the 12th most populous country in the world. Over 97% of the population has access to electricity, but 30 million people – a quarter of the total – still use firewood and other biomass for cooking. Growth is recovering after being hit by the global recession and oil price shock. The government is beginning to make changes to the energy sector, but nearly all energy prices are currently state controlled.

The major energy sources in the country are oil (55%) and natural gas (29%). Although production has declined significantly over the past five years, Mexico remains the world’s seventh largest oil producer. The industry produces about 2.6 million barrels of oil a day and exports nearly half of that, mainly to the United States.  The oil industry provided nearly one-third (32%) of total government revenue in 2013, and declining production and global prices have negatively affected the country’s finances.

The country also produces 6.8 million cubic feet of natural gas a day. This is increasing rapidly, but demand is outstripping supply and liquefied natural gas (LNG) is also imported from Qatar, Nigeria and Peru.

Among the proposed post-2015 development goals, there are three particular energy-related targets which we can consider in a Mexican context: increasing the use of renewable energy (to reduce dependency on fossil fuels and cut greenhouse gas emissions), improving energy efficiency and reforming the current energy subsidies.

The government is already working to reduce household energy consumption by increasing the efficiency of lighting and electrical appliances, funded by $307 billion in loans and grants from the World Bank. The planned efficiency increases would produce cuts in energy use and carbon dioxide emissions worth nearly a billion dollars. This makes the target quite a smart one: every peso spent would give benefits (reductions in energy use and greenhouse gas emissions) valued at about three pesos.

Another good target would be a reduction in energy subsidies. Nearly all energy sources – including electricity, gasoline, diesel and liquefied petroleum gas (LPG) – are subsidised, at a total cost of nearly $13 billion a year (1.7% of GDP).

On average over the past decade, gasoline subsidy has been about 1.2 pesos per litre. Although intended to make fuel more affordable, more than half this subsidy goes to the wealthiest 20% of the population, while the poorest 20% get only 3%. Eliminating this subsidy would boost the economy and cut demand for fuel by a few percent.

The country’s poorest could be compensated for higher fuel costs by a social protection program costing $3.35 billion a year, and spending on this would decline as the economy grows. The annual benefit to the economy would be about $12.4 billion. Each peso spent on the social protection programme would give economic benefits worth nearly four pesos.

The third possible energy target would be to increase the use of renewable energy. The government has a target of 35% of electricity to be generated from non-fossil sources by 2024. Most of this would come from hydroelectric power stations and the single existing nuclear power plant, but the target for non-hydro renewables (mainly wind energy) is set at 5%. This was originally 8.2%, but reduced for cost reasons.

Expanding wind generation to 5% of the total would cost $14 billion. There would be a number of benefits: reduced carbon dioxide emissions, reduced ill health from air pollution and avoided costs of generation from other sources. However, these benefits are worth at best $5 billion, so investing in more renewable energy is not a good target to set.